Deck 8: Accounting for Long-Term Assets

Question 1

Obsolescence refers to plant assets that typically have longer useful lives and higher salvage values.

Answer 1

False

Question 2

Plant assets are used in operations and have useful lives that extend over more than one accounting period.

Answer 2

True

Question 3

Depreciation is higher in earlier years and income is lower in the later years when using straight-line versus accelerated methods.

Answer 3

False

Question 4

Revising an estimate of the useful life or salvage value of a plant asset is referred to as a change in accounting estimate and is reflected in the current,and future financial statements.

Question 5

A plant asset's useful life is the length of time it is productively used in a company's operations.

Question 6

Salvage value is an estimate of an asset's value at the end of its useful life.

Question 7

Plant assets are reported on a balance sheet at their book value (acquisition costs less accumulated depreciation),and not necessarily at fair (market)value.

Question 8

When plant assets are purchased as a group in a single transaction for a lump-sum price,the cost of the purchase is allocated among the different types of assets acquired based on their relative market values.

Question 9

Depreciation expense is calculated using its cost,estimates of an asset's salvage value,and an estimated useful life.

Question 10

Plant assets refer to nonphysical assets that are used in the operations of a business.

Question 11

If land is purchased as a building site,the cost of removing existing structures is not charged to the Land account.

Question 12

The book value of an asset when using double-declining-balance depreciation is always greater than the book value from using straight-line depreciation,except at the beginning and the end of the asset's useful life,when it is the same.

Question 13

Financial accounting and tax accounting require the same recordkeeping and there should be no difference in results between the two accounting systems.

Question 14

The process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use is called depletion.

Question 15

When an asset is purchased (or disposed of)at a time other than the beginning or the end of an accounting period,depreciation is recorded for part of a year so that the year of purchase or the year of disposal is charged with its share of the asset's depreciation.

Question 16

Total depreciation expense over an asset's useful life will be identical under all methods of depreciation.

Question 17

Land improvements include parking lots and walkways.

Question 18

Depreciation does not measure the decline in market value of an asset each period.

Question 19

It is necessary to report both the cost and the accumulated depreciation of plant assets in the financial statements.

Question 20

Once an asset's book value equals its salvage value,depreciation stops.

Question 21

Companies that have a relatively large amount invested in assets to generate a given level of sales are considered capital-intensive.

Question 22

An accelerated depreciation method yields larger depreciation expense in the early years of an asset's life and less depreciation expense in later years.

Question 23

A company purchased a plant asset for $60,000.The asset has an estimated salvage value of $4,000,and an estimated useful life of 7 years.The annual depreciation expense using the straight-line method is $4,000 per year.

Question 24

The straight-line depreciation method results in consistent depreciation expense.

Question 25

Total asset turnover is calculated by dividing average total assets by net sales.

Question 26

The Modified Accelerated Cost Recovery System (MACRS)is part of the U.S.federal income tax laws and may be used for financial reporting.

Question 27

The double-declining balance method is applied by (1)computing the asset's straight-line depreciation rate,(2)doubling it,(3)subtracting salvage value from cost,and (4)multiplying the rate times the net value.

Question 28

Total asset cost plus depreciation expense equals book value.

Question 29

The cost of fees for insuring the title and any accrued property taxes are included in the cost of land.

Question 30

An asset's cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.

Question 31

Total asset turnover is calculated by dividing net sales by average total assets.

Question 32

The units-of-production method of depreciation charges a varying amount of expense for each period of an asset's useful life depending on its usage.

Question 33

The purchase of a property that included land,building,and related improvements is called a lump-sum or basket purchase.

Question 34

When a company constructs a building,the cost of the building includes materials and labor but not design fees,building permits,or insurance during construction.

Question 35

If a machine is damaged during unpacking,the repairs are added to its cost.

Question 36

Edmond reported average total assets of $9,965 million and net sales of $10,430 million.Its total asset turnover equals .96.

Question 37

Additions to land that increase the usefulness of the land such as parking lots,fences,and lighting are not depreciated.

Question 38

Asset turnover is computed by dividing net sales by average total assets.

Question 39

Decision makers and other users of financial statements are especially interested in evaluating a company's ability to use its assets in generating sales.

Question 40

Duncan reported net sales of $2,523 million and average total assets of $1,476 million.Its total asset turnover equals 1.71.

Question 41

If an asset is sold above its book value,the selling company records a loss.

Question 42

The cost of an intangible asset is systematically allocated to depreciation expense over its estimated useful life.

Question 43

A leasehold refers to the rights the lessor grants to the lessee under the terms of the lease.

Question 44

Amortization is the process of allocating the cost of natural resources to periods when they are consumed.

Question 45

Intangible assets are nonphysical assets used in operations that give owners' long-term rights or competitive advantages.

Question 46

Plant assets can be disposed of by discarding,selling,or exchanging them.

Question 47

Revenue expenditures,also called income statement expenditures,are additional costs of plant assets that do not materially increase the assets' life or productive capabilities.

Question 48

Natural resources may be reported under either plant assets or their own separate category on the balance sheet.

Question 49

Depletion is the process of allocating the cost of natural resources to periods when they are consumed.

Question 50

Accounting for the exchange of assets depends on whether the transaction has commercial substance; commercial substance implies that it alters the company's future cash flows.

Question 51

When the usefulness of plant assets used to extract natural resources is directly related to the depletion of a natural resource,their costs are depreciated using the units-of-production method of depreciation.

Question 52

The first step in accounting for an asset disposal is to calculate the gain or loss on disposal.

Question 53

Revenue expenditures are also called balance sheet expenditures.

Question 54

A gain or loss is recorded for exchanges of plant assets with commercial substance.

Question 55

Extraordinary repairs are expenditures extending the asset's useful life beyond its original estimate,and are capital expenditures because they benefit future periods.

Question 56

Capital expenditures,also called balance sheet expenditures,are additional costs of plant assets that provide benefits extending beyond the current period.

Question 57

A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale is less than the asset's book value.

Question 58

Natural resources are assets that include standing timber,mineral deposits,and oil and gas fields.

Question 59

Betterments are a type of capital expenditure.

Question 60

Gain or loss on the disposal of assets is determined by comparing the disposed asset's book value to the market value of any assets received.

Question 61

A trademark is an exclusive right granted to its owner to publish and sell a musical,literary,or artistic work during the life of the creator plus 70 years.

Question 62

Depreciation:

A)Measures the decline in market value of an asset.
B)Measures physical deterioration of an asset.
C)Is the process of allocating the cost of a plant asset to expense.
D)Is an outflow of cash from the use of a plant asset.
E)Is applied to land.

Question 63

Plant assets are defined as:

A)Tangible assets that have a useful life of more than one accounting period and are used in the operation of a business.
B)Current assets.
C)Held for sale.
D)Intangible assets used in the operations of a business that have a useful life of more than one accounting period.
E)Tangible assets used in the operation of business that have a useful life of less than one accounting period.

Question 64

The term inadequacy,as it relates to the useful life of an asset,refers to:

A)The inability of plant assets to meet growing production demands.
B)An asset that is worn out.
C)An asset that is no longer functional.
D)The condition where the salvage value is too small to replace the asset.
E)The condition where the asset's salvage value is less than its cost.

Question 65

A machine originally had an estimated useful life of 6 years,but after 4 complete years,it was decided that the original estimate of useful life should have been 10 years.At that point the remaining cost to be depreciated should be allocated over the remaining:

A)2 years.
B)4 years.
C)6 years.
D)16 years.
E)10 years.

Question 66

A change in an accounting estimate is:

A)Reflected in past financial statements.
B)Reflected in future financial statements and also requires modification of past statements.
C)Reflected in current and future years' financial statements,not in prior statements.
D)Not allowed under current accounting rules.
E)Considered an error in the financial statements.

Question 67

Beckman Enterprises purchased a depreciable asset on October 1,Year 1 at a cost of $100,000.The asset is expected to have a salvage value of $20,000 at the end of its five-year useful life.If the asset is depreciated on the double-declining-balance method,the asset's book value on December 31,Year 2 will be:

A)$36,000
B)$42,000
C)$54,000
D)$16,000
E)$90,000

Question 68

A company used straight-line depreciation for an item of equipment that cost $12,000,had a salvage value of $2,000 and a five-year useful life.After depreciating the asset for three complete years,the salvage value was reduced to $1,200 but its total useful life remained the same.Determine the amount of depreciation to be charged against the equipment during each of the remaining years of its useful life:

A)$1,000
B)$1,800
C)$5,400
D)$2,400
E)$2,000

Question 69

A patent is an exclusive right granted to its owner to manufacture and sell a patented item or to use a process for 20 years.

Question 70

One characteristic of plant assets is that they are:

A)Current assets.
B)Used in operations.
C)Natural resources.
D)Long-term investments.
E)Intangible.

Question 71

A copyright gives its owner the exclusive right to publish and sell a musical,literary,or artistic work during the life of the creator plus 17 years.

Question 72

When originally purchased,a vehicle costing $23,000 had an estimated useful life of 8 years and an estimated salvage value of $3,000.After 4 years of straight-line depreciation,the asset's total estimated useful life was revised from 8 years to 6 years and there was no change in the estimated salvage value.The depreciation expense in year 5 equals:

A)$5,000.
B)$2,875.
C)$5,750.
D)$11,500.
E)$2,500.

Question 73

The term,obsolescence,as it relates to the useful life of an asset,refers to:

A)The halfway point of an asset's useful life.
B)A plant asset that is becoming outdated and no longer used.
C)The inability of a company's plant assets to function as designed.
D)An asset's salvage value becoming less than its replacement cost.
E)Intangible assets that have been fully amortized.

Question 74

Peavey Enterprises purchased a depreciable asset for $22,000 on April 1,Year 1.The asset will be depreciated using the straight-line method over its four-year useful life.Assuming the asset's salvage value is $2,000,Peavey Enterprises should recognize depreciation expense in Year 2 in the amount of:

A)$10,000
B)$5,000
C)$5,500
D)$20,000
E)$9,250

Question 75

Since goodwill is an intangible asset,it is amortized each year using the straight-line method.

Question 76

Salvage value is:

A)Not a factor relevant to determining depletion.
B)A factor relevant to amortizing an intangible asset with an indefinite life.
C)An estimate of the asset's value at the end of its benefit period.
D)A factor relevant to determining depreciation under MACRS.
E)A factor relevant to determining an asset's useful life.

Question 77

Once the estimated depreciation expense for an asset is calculated:

A)It cannot be changed.
B)It may be revised based on new information.
C)Any changes are accumulated and recognized when the asset is sold.
D)The estimate itself cannot be changed; however,new information should be disclosed in financial statement footnotes.
E)It can be changed only if U.S.tax law changes.

Question 78

Peavey Enterprises purchased a depreciable asset for $22,000 on April 1,Year 1.The asset will be depreciated using the straight-line method over its four-year useful life.Assuming the asset's salvage value is $2,000,what will be the amount of accumulated depreciation on this asset on December 31,Year 3?

A)$5,000
B)$15,000
C)$15,125
D)$20,000
E)$13,750

Question 79

The relevant factors in computing depreciation do not include:

A)Cost.
B)Salvage value.
C)Useful life.
D)Depreciation method.
E)Market value.

Question 80

The useful life of a plant asset is:

A)The length of time it is productively used in a company's operations.
B)Never related to its physical life.
C)Its productive life,but not to exceed one year.
D)Determined by the FASB.
E)Determined by law.